Steven Mendelsohnⁱ

Small business is our nation's largest employer and one of the fastest growing sectors of our economy. The attractions of being one's own boss are considerable, and the range of particular goods and services specialization the economy needs is greater than ever before. Technology has made it easier to conduct business at times and places of the individual's choice, and a number of programs aimed at economic independence for people with disabilities now devote resources to small business that were not available in the past.

The tax laws too are more favorable than they have been in the past, but they are also more complex. Understanding them can help improve the odds in the always risky and demanding world of small business. For entrepreneurs with disabilities this means knowing a little about the law in general and understanding additional provisions that deal specifically with disability-oriented expenses and concerns.

Types of Businesses

Most small businesses and start-ups are operated as sole proprietorships. Corporations and partnerships are other forms, and there are subcategories within each of those. You can often tell the subcategory by the letters after the entity's name (LLC, PC, Inc, etc…). Corporations and partnerships file tax returns. From these the taxable income to the individual shareholder or partner is determined, and that profit (or loss) is carried over to the individual's personal return. With a sole proprietorship, there is no business return as such. Net profit or loss from business is calculated and reported on Schedule C to the individual's personal return.

It is important to note several things about Schedule C. Self-employed taxpayers are entitled to certain deductions that employed ones are not. The business is allowed to deduct the costs of health insurance for the proprietor and dependents. The amounts that can be deferred from taxation in retirement accounts are often more generous. All the ordinary and necessary expenses of the business, including assistive technology (AT) that it might buy for use in the business, are deductible. However, all these deductions are subject to certain limits. Some of them can be taken only out of profit, meaning the business must have a net gain on Schedule C. Some are subject to dollar limitations. For the individual taxpayer, the most important point may be that you do not need to itemize in order to benefit from them.

Credits & Deductions

People with disabilities, or who have customers or clients with disabilities, face accommodations and other expenses that other small businesses do not. Several provisions of the law can help with these. First, the disabled access credit (DAC)--Internal Revenue Code Sec. 44-- helps small businesses (under 30 full-time employees or with gross yearly proceeds under $1 million) cover the costs of access expenditures. The amount of the tax credit is equal to 50% of the eligible access expenditures in a year that exceed $250 but are not more than $10,250. Thus, the maximum allowable credit is $5,000. By converting expenses from a deduction to a credit you make them much more beneficial, because instead of just lowering your taxable income, credits come off your actual tax bill. If you had $1,000 profit from business and owed $100 tax on it, a $100 deduction would lower your taxable income to $900. However, that same $100 as a credit taken off your taxes would reduce your tax liability to zero.

The second specialized provision is the architectural and transportation barriers removal deduction--IRS Sec. 190. Available to businesses of any size, this deduction allows a firm to deduct up to $15,000 a year in qualifying barrier removal expenses for the "elderly and handicapped". Such expenses would normally be considered capital expenses, so would have to be deducted over a number of years reflecting their expected useful life. By converting them to ordinary expenses, they become deductible much faster.

One important question about these provisions relates to their applicability to home-based businesses. The DAC is not available for any sort of new construction expenses; so home modifications do not qualify. The DAC is only to modify existing facilities. The barrier removal deduction can be used, but the modifications must conform to the guidelines for modifications under the regulations; must not be part of general work on the property; and (here is the trickiest part) they must be solely for the purposes of the business. They cannot be an excuse for making modifications for the sake of residential accessibility.

It helps therefore if one has a part of the house devoted solely to business. Obviously, if there is only one entrance to the building that needs to be made accessible to accommodate employees or customers with disabilities, the law will not bar that modification because the residents would have to use that entrance as well. Yet, if the accommodation was for the benefit of the owner, who already lived there, suspicions would understandably be raised.

The DAC is best used for assistive technology or specialized services such as readers or sign-language interpreters. It should not matter where the business is conducted, but the DAC likewise has certain wrinkles taxpayers need to watch. First, if used to accommodate employees, including an owner, there is some concern that the IRS may not allow it for businesses with fewer than 15 employees. This is because the ADA's anti-discrimination in employment requirements do not apply to firms with under 15 employees. Since the original intent of the credit was to shield small businesses against the costs of ADA compliance, the IRS is thought to believe that where the ADA does not apply the credit cannot either. There are no cases on this point, but some observers believe the IRS could be successfully challenged on appeal if it formally asserts this interpretation.

Allowed Expenses

Another thorny problem is what expenses the IRS will allow. The few cases decided under the provision show that the desire to accommodate customers with disabilities might not be enough. Businesses that purchase specialized equipment should be prepared to show that the devices were necessary for effective treatment or communication with people with disabilities. If the equipment only improves the quality of service to all, the IRS is unlikely to grant the credit.

There is absolutely no indication in the law that a firm needs to be accused of violating the ADA in order to claim the credit. The issue here is one of evidence. Motivations, customer requests or complaints and research should be documented. In addition, if a piece of equipment includes accessibility features or modifications that make it more expensive than the standard version would be, that fact is important evidence.

After mentioning these problems with the DAC, it is important to mention one very good thing about it. If a small business does not have enough taxable income to absorb all of its eligible access expenditures, the excess need not be lost. This is because the DAC can be carried-back or carried forward--IRS Sec. 38. If the business doesn't have enough income this year, it can carry the excess back to the previous year, or if it is a new startup, it can carry it forward to at least the three following years, claiming the remaining credit as an offset against the taxable income of those years.

Nothing in tax law is ever simple. Nevertheless, with careful planning and good research, small businesspeople with disabilities can significantly increase their bottom lines and their chances for success. At the same time, all businesses can do much more to accommodate people with disabilities as customers and clients. More information is available from a number of sources, including several IRS publications (e.g., IRS Pub. No. 907), and ADA-related materials published jointly with the Department of Justice. Most professional tax preparers should be familiar with these provisions, but unless told of the disability-related issues, they will not know that the law applies. Advance planning is always key.

Read Steven Mendelsohn's article in the January edition of EQUITY "Tax Law and Asset Accumulation for People with Disabilities" for more information.

i Steven Mendelsohn is a nationally recognized legal expert on tax policy and its impact on persons with disabilities. He is currently co-principal investigator of the Asset Accumulation and Tax Policy Project (AATPP) at the Law, Health Policy and Disability Center, University of Iowa, College of Law. AATPP is 100% funded by U.S. Department of Education grant #H133A031732.